Suggested Answer to HW7-1(a)

1. (a) Yes, both firms have dominant strategies, charging the low price. Quick examination should convince you that Firm X does better no matter what Y does by choosing ``Low.'' The same is true for firm Y. The dominant strategy outcome (both play low) is also a Nash Equilibrium. That is, both firms are doing the best they can given what the other firm is doing. So, if the game is only played once each firm will play its dominant strategy, charging the low price and each earning profits of 3 million.